How Debt Ceilings Increase Debt

October 28, 2013

The recent wrangling in Washington over the debt ceiling, with both sides promising to return to battle early next year, never got around to considering this proposition: Maybe debt ceilings are a bad idea, because they may lead to increased spending, say Gary S. Becker, a Nobel laureate and professor of economics at the University of Chicago, and Edward P. Lazear, former chairman of the president's Council of Economic Advisers (2006-09) and a professor at Stanford University's Graduate School of Business. Both are fellows at Stanford's Hoover Institution.

A debt ceiling may seem like a good way to constrain out-of-control government, by focusing attention on the federal deficit and the resulting debt increase. (For the record, the United States debt recently surpassed $17 trillion.)

But that focus draws attention from the underlying problem: too much spending.

Debt ceilings also provide a false sense of security.

Borrowing will never get too far out of hand, the thinking goes, because the ceiling will cap it.

Yet the U.S. debt hits the debt ceiling time and again because the federal government runs chronic deficits.

This addiction to overspending has forced Congress to raise the debt ceiling more than 90 times during the past 70 years, and 15 times since 1993 alone.

Fundamentally, the growing U.S. debt is a manifestation of the expanding size of government. Focusing on the deficit is a distraction from this concern. Since deficits can be reduced either by cutting spending or raising taxes, both liberals and conservatives can agree on the value of reducing deficits while strongly disagreeing on how to reduce them.

Better than a debt-ceiling rule would be one that controls spending directly, not the debt that results from it. The specifics are less important than the general principle, which is that spending growth should be limited in a way that brings government outlays back down to historic ratios relative to gross domestic product. This would place the attention where it belongs, on spending rather than on the difference between outlays and receipts. Increased spending, coupled with even larger increases in taxes, might bring the deficit down, but it would damage economic growth and well-being.